Today we'll look at Concurrent Technologies Plc (LON:CNC) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Concurrent Technologies:
0.16 = UK£3.7m ÷ (UK£27m - UK£3.9m) (Based on the trailing twelve months to June 2019.)
Therefore, Concurrent Technologies has an ROCE of 16%.
Does Concurrent Technologies Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Concurrent Technologies's ROCE appears to be substantially greater than the 11% average in the Tech industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Concurrent Technologies compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how Concurrent Technologies's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Concurrent Technologies.
What Are Current Liabilities, And How Do They Affect Concurrent Technologies's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Concurrent Technologies has total assets of UK£27m and current liabilities of UK£3.9m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Concurrent Technologies's ROCE
Overall, Concurrent Technologies has a decent ROCE and could be worthy of further research. Concurrent Technologies looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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